I recently sat down with Strategic Partner Joe Massey of Castle & Cooke Mortgage to do a deal analysis on a property he helped close.  His clients are part time real estate investors who were looking for a solid property to hold onto.  They decided to invest in Pueblo in order to find a single family home that cash flowed and had a lower cost of entry than Denver or Colorado Springs.

Investor Profile

These investors are a married couple living in Denver with two kids.  They work full time jobs and invest in real estate on the side to supplement their income.  They own a few properties already and have been saving the money they’re making from them. 

They’d been in touch with Joe and Leah about finding another investment property.  Since they didn’t want to spend more than $70K, they decided to look in Pueblo for a single family home with no HOA.  

Investment Property Details

Pueblo has a lower cost of entry than Denver or Colorado Springs, and $70K can go further down there.

Appealing Features of the Property

The property is a single family home in Pueblo proper.  It was built in 1900, but was renovated several times over the years.  There are two bedrooms and one bathroom in the 800 sqft home.

How the Deal Was Sourced

This property was listed on the MLS.

Inspection Issues

The home was in turnkey condition, and no issues were found during the inspection.

Property Financing Details

I used the Rental Property Spreadsheet, created by Joe, to run the numbers on this property.

Property Overview

The purchase price of the house was $155K, and they put down 25%.  Their all in costs were $44K, well under their $70K budget. 

They closed on the property in mid-May 2022 and had an interest rate of 5.625%.

The rent appraisal for the property came back with a range between $1000-1550, targeting $1200.  Joe’s clients are aiming for $1400-1500 because of the nice finishes.  We’ve found that appraiser rents seem to lag behind the trends because the data is very hard to find.  Jenny and Leah’s conservative rent estimates are usually $50-100 lower than actuals, so these clients’ estimates are reasonable.

Property Operating Expenses

This property has pretty straightforward underwriting.  Because the clients live in Denver, they’re paying for property management.  The tenants are covering all other utilities. 

First Year Returns

This home is expected to cash flow $4K a year, with a 9% cash on cash return, and a 7.8% cap rate.  The clients were thrilled when they saw these numbers and are excited to let it appreciate over the long term.

To get a better idea of how down payments affect returns, we ran the numbers at 20% and 15% down:

With a 20% down payment, the interest rate goes up to 5.875% and the acquisition costs increase by $1000, but the all in cost drops to $37K.  The cash flow drops about $600 to $3300 a year, but the cash-on-cash return and cap rate stay the same.

The numbers are a little wonkier with a 15% down payment because there’s PMI.  The interest rate jumps to 6%; acquisition costs increase by an additional $1000; and they’re paying monthly PMI, which is estimated at $50.  The cash flow drops to $2000 annually, and the cash-on-cash return is 6.5%

However, the Return on Investment jumps all the way to 41%.  When evaluating returns, it’s important to remember that cash flow isn’t everything. 

Conclusion

Interest rates are climbing at the fastest rate in US history.  However, over the last 45 years, the average interest rate is 8.3%.  The interest rate for investment properties is usually .75% higher, making the average interest rate for those properties over the past 45 years 9%. 

We need to keep this historical data in perspective when talking about interest rates now.  When buying a property, you can either do a cash out refinance if the rates drop, or be happy that you closed at the right time if rates continue to climb. 

This deal analysis is a great example of how you can still cash flow in a variety of scenarios if you find the right property.

Connect with Us

If you have questions about loans, financing, or different options for a property, reach out to Joe via:

• Phone: 303-809-7769
• Email: [email protected] 
• Website: https://www.loansbyjoemassey.com/

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Where Should You Invest $50k in Colorado?

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